Debt fears haunt Fiat's grand Chrysler plan

A Fiat logo is seen on the front of a Fiat 500 during the press days for the North American International Auto show in Detroit, Michigan, January 11, 2011.

MILAN (Reuters) - Concern over Fiat SpA's (FIA.MI) ballooning debt dragged its stock lower on Tuesday as the Italian car maker moved a step closer towards a full merger with Chrysler by outlining plans for a single management team.

Fiat CEO Sergio Marchionne, who also runs Chrysler, raised his 2011 targets on the back of forecast-beating second-quarter results that incorporated the number 3 U.S. automaker for the first time since Fiat took a majority stake in it last month.

But the new targets were below some analysts' estimates, and worries about a higher-than-expected debt at the end of 2011 pushed Fiat shares 4.5 percent lower at 7.17 euros at market close.

The joint management team which Marchionne plans to unveil in the next few days is seen as a logical step bringing the two companies closer to a full-blown merger. But analysts say Fiat needs to first explain why its debt is rising, and how it may fund the purchase of the Chrysler stake it does not already own.

"Everything about the operating line looks good. The big confusion would be around the net debt figure. We'd like to know why there will be a 2 billion net outflow in the second half," said a London-based analyst who asked not to be named.

Fiat, Europe's sixth-biggest automaker by market share, forecast net debt of between 5.0 and 5.5 billion euros at the end of this year -- compared with full-year analyst forecasts of 4.8 billion euros (4.2 billion pounds) and a second-quarter debt of 3.4 billion euros.

It said it now expected 2011 revenues of more than 58 billion euros -- up from earlier guidance of 37 billion euros which did not incorporate Chrysler. However the target was below pro-forma combined net revenues of 67 billion euros in 2010.

Fiat also raised its trading profit target to around 2.1 billion euros -- slightly below an analyst consensus of 2.2 billion euros.

Also weighing on the shares was news that Fiat expects its share of the Brazil's market, which hit record sales in the first half of the year and is Fiat's fastest-growing market, to remain flat in 2011 compared with 2010.

"Q2 results are better than consensus but the outlook is slightly below," wrote J.P. Morgan Cazenove in a report.

FUNDING WORRIES

Marchionne, credited with turning around Fiat in recent years, wants to elevate the Italian carmaker to a global player through a revamped Chrysler. The group has previously targeted around 100 billion euros in combined revenues by 2014.

He took over management of a bankrupt Chrysler under a 2009 bailout deal and has built up Fiat's stake in the U.S. car maker cheaply and more quickly than anticipated.

By the end of this year its holding will rise to 58.5 percent -- an increase linked to Chrysler developing a Fiat-based fuel-efficient midsize car.

But Fiat needs to decide what to do with the rest of Chrysler, a 41.5 percent stake that is owned by VEBA, the United Auto Workers union trust fund.

After initialy planning an IPO to allow VEBA to cash in on its stake, Marchionne now seems to be aiming to buy it.

If he goes for a full takeover of Chrysler, he will need to convince ratings agencies Moody's and Fitch -- which have already warned they may downgrade Fiat's debt -- that Fiat's finances are solid enough.

That has led to speculation Fiat may float Ferrari, although Ferrari's chairman said last week there was no plan to do so.

Fiat, posted second-quarter group trading profit of 525 million euros ($753 million), as strong U.S. and Brazilian sales helped offset a weak European market in a quarter that included profits from Chrysler for the month of June.

That compared with a trading profit of 307 million euros for Fiat alone a year ago and a median analyst forecast in a consensus distributed by Fiat of 485 million euros. Fiat did not release 2010 proforma results for the second quarter alone.

(Additional reporting by Deepa Seethamaran in Detroit, Michel Rose and Valentina Za in Milan ; Editing by Andrew Callus)